Three Essays in the Economics of the Physician Firm.

Abstract

This dissertation explores three aspects of the physician firm. As such, the current work is concerned with the contribution that quality considerations can make toward our understanding of the medical market. The first of three essays introduces quality into the literature aimed at estimating the supply function of physician firms. This study finds that explicit modeling of quality, both theoretically and empirically, produces results superior to past work in this field and indicates that physicians behave as if they are competitive economic agents. The second essay considers the effect of Medicaid on the behavior of physicians, especially their allocation of quality. As a result of theoretical and empirical exploration, this essay concludes that Medicaid, due to its restrictive reimbursement mechanisms, produces a two-tiered system of health care. This system traps those covered by Medicaid in a tier which allocates not only fewer units of health care, but also provides the minimum possible quality of care. The final essay in this dissertation is an empirical test of the supplier induced demand hypothesis in medical service. Contrary to past findings which support the view that physicians are able to induce demand for their services when faced with competition, this work finds that physicians actually increase the quality of their service in the face of competitive pressure. By ignoring quality as a dimension of service, past work has suffered from specification error which only appeared to support the inducement hypothesis.